CEO succession

CEO succession used to be a simple
matter of grooming the next heir
apparent to step into the shoes of a retiring CEO. However, this does not
reflect the majority of the CEO succession scenarios today.

CEO turnover — and the lack of a solid
succession plan — has become a problem in corporate America today.
According to a survey of the largest publicly traded companies, CEO turnover
has increased 59 percent from 1995 to
2006, and during that same time period,
there was a staggering 300 percent
increase in the number of performance-related CEO departures.

“We’re seeing an increased number of
interim CEOs to fill that gap of that
turnover,” says Christine Mooney, assistant professor in the College of Business
at Northern Illinois University.

Smart Business spoke to Mooney
about the trend of CEO succession today
and if interim CEOs are the best solution
to the high CEO turnover rate.

What is CEO succession like today?

There are four ways that CEOs are now
picked:

 

  1. Heir apparent. This is the traditional way CEOs have been chosen, that is,
    an executive picked and groomed from
    within the ranks of a company. Twenty
    years ago this was the typical corporate
    succession plan. Though still considered
    the most effective, it is a much less common succession method in corporate
    America.
  2. Horse race. Some large companies
    such as GE and Procter & Gamble use
    this technique — successfully I might
    add — where two or three ‘potential
    heirs’ are selected. They typically
    become C-level executives and all are
    vying for the CEO position. The ‘best’
    candidate wins.
  3. Outsider CEO. This is a CEO
    selected from the outside of a company
    or an executive that has worked at the
    company for less than two years.
  4. Interim CEO. This is an emerging
    method that is increasingly being used by
    companies. When hiring an interim CEO becomes the default succession plan for companies, this may be a red flag.

     

Is hiring an interim CEO a sign of a troubled
organization?

There can be several reasons an organization hires an interim CEO: it has no
succession plan in place, it is financially
distraught and brings in an outsider to
clean up the mess, or there has been a
revolving door of CEOs because of internal trouble.

We’re seeing more interims step in
when there are so-called ‘normal’ retirements, but in actuality, the CEO has likely been ousted. If the organization had a
succession plan the board wouldn’t be
choosing an interim, although it is hard
to tell what the thought process is of a
company. You could say it is choosing an
interim to test the CEO or because the
company is trying to make a choice
between an outside and inside CEO.

Regardless, research has shown CEO
succession is in a crisis mode at the
moment. A recent report looking at CEO successions from January 2008 to June
2008 reveals 37 successions in the S&P
500 companies; more than half of those
— 54 percent — were not planned retirements. Other studies have shown that
CEOs now fail 20 percent of the time
within the first 18 months on the job;
CEO tenure is also down — it used to be
eight to 10 years, and it is now about
five.

Will we be seeing more interim CEOs populate companies?

Boards have become less patient with
their CEOs and are relying more on
interims when they oust the CEO
because of poor performance. There
appear to be a few types of interims that
a company will hire: a younger executive
who could bring necessary change and
innovation but who needs to be tested
out, a retired CEO sitting as an outside
director to buy the board time to find an
outside candidate, or the former CEO
asked to return because the company
needs a face of stability during a serious
financial crisis.

Instead of using interims as a default succession plan, what would be a better solution to CEO succession?

First, get the board committed to succession planning as a priority. The board
needs to manage the leadership pipeline.
This doesn’t mean just selecting the next
CEO but considering all C-level executives. Next, have open communication.
Communicate not only throughout the
leadership pipeline, but be explicit about
the path up that pipeline. Motivate and
evaluate employees throughout the
pipeline. The current leadership needs
to be fully involved in motivating and
evaluating the next generation of leaders. Finally, manage the succession plan.
This is not just a once every five years
discussion; it should be ongoing. The
entire process needs to be managed to
ensure a smooth transition.

CHRISTINE MOONEY is an assistant professor in the department of management at the College of Business at Northern Illinois
University (www.niu.edu). Reach her at (815) 753-6308 or [email protected].